SHANGHAI, China – The teddy bears selling for $1.40 in Shanghai's IKEA store may be just about the cheapest in town, but they're not made in China – they're stitched and stuffed in Indonesia.

The fluffy brown toys reflect a new challenge for China: Its huge economy, which has long offered some of the world's lowest manufacturing costs, is losing its claim on cheapness as factories get squeezed by the rising costs of energy, materials and labor.

Those expenses, plus higher taxes and stricter enforcement of labor and environmental standards, are causing some manufacturers to leave for lower-cost markets such as Vietnam, Indonesia and India.

Costs have climbed so much that three-quarters of businesses surveyed by the American Chamber of Commerce in Shanghai believe China is losing its competitive edge.
The higher costs mean Western consumers are bound to face higher prices for iPods, TVs, tank tops and many other imported products made by small Chinese subcontractors.

“Americans continue to want to buy at lower prices,” said Kevin Burke, president and CEO of the American Apparel and Footwear Association. “They are used to going to the store during Christmas and getting something cheaper than a year ago.”

That's no longer a sure thing.

For instance, American toy makers, who rely heavily on Chinese factories, expect prices to increase 5 percent to 10 percent for the 2008 holiday season, largely because of rising manufacturing costs.

Costs in China are climbing nationwide, but the greatest pain is being felt in the south, where about 14,000 Hong Kong-run factories could close in the next few months, said Polly Ko of the Economic and Trade Office in Guangdong, which is near Hong Kong.

To adapt, many multinational manufacturers – including Intel, iPod maker Hon Hai Technology Group and Japanese companies such as Canon and Sony – are expanding operations in Vietnam.

Auto-parts makers are decamping for the Middle East and Eastern Europe, textile makers to Bangladesh and India.

Thousands of smaller Hong Kong, Taiwan or Chinese-run factories in south China's traditional export hub of Guangdong are closing or moving out.

Meanwhile, Chinese inflation has risen to its highest point in more than 11 years, jumping 7.1 percent in January, as snowstorms worsened food shortages. The biggest price hikes have been for food, but analysts say longer-term pressures on prices for manufactured goods will persist.

“China needs to reprice its exports, and that has to be accepted by international buyers,” said Andy Xie, an independent economist based in Shanghai.

But increasing prices may be tough for Chinese manufacturers, given the suspicions about product quality raised by a slew of scandals over tainted or potentially dangerous products.

China has a huge pool of unskilled rural laborers, but its supply of experienced, skilled talent falls far short of demand. The gap has been pushing wages up by 10 percent to 15 percent a year.

A new labor law requiring stronger employment contracts is expected to raise costs even more.

Prices for plastics and other materials have climbed 30 percent or more, and electricity rates are surging, too. The government has also slashed export tax rebates – originally given to promote exports – on more than 2,800 products accounting for nearly 40 percent of all Chinese exports.

The steady appreciation of China's currency, the yuan, also contributes to the problem.

At IKEA's Shanghai store, a stroll down the aisles finds most products made in China rather than Europe or the United States. But a growing share of the goods come from less developed markets: stuffed toys from Indonesia, wooden train sets from Bulgaria, colorful rugs and throws from India, bed sheets from Ethiopia, baskets and wooden trays from Vietnam.

“We are constantly having to compete with other countries and suppliers,” said Linda Xu, public relations manager in China for the Swedish retailer.

For many companies, especially those focused on the potentially huge Chinese market, leaving the country would be a last resort, said Jonathan Woetzel, co-author of “Operation China,” a book that outlines strategies for competing in the country's fast-changing business environment.

“You'd have to start over, essentially,” he said. “There's still quite a lot of opportunity to take cost out of the system. What we do see is supply chains extending inland, for example, going inland for final assembly.”

Despite those strategies, prices for Chinese-made products will probably continue to rise in the next few years, causing some companies to invest elsewhere, UBS economist Jonathan Anderson said.

“Over the medium term, where are you going to invest if you're building a factory? Maybe not China anymore. Maybe Bangladesh, Vietnam, Indonesia. Maybe India.”

Tycho: So sooner than later, collecting Star Wars toys will not be the same anyway. We had a 7 year run from 1978 to 1985 and then a 13 year run starting from 1995 and lasting through today. That's 20 years or 2/3 of Star Wars' 30-yr existence. Should it continue towards a 40 year experience, I doubt things will look the same as they have in our hobby's past. That is global economics. Things shift. Different countries gain comparative advantages (which might be cheap labor). It might be that one day, cheap manufactured goods come from Iceland. Or the United States will fall so far behind that we'll once again have a large pool or ignorant, unskilled labor, desperate for jobs to feed our families. Then the cycle will repeat itself. I don't know if our nation and political system would last through the contraction and expansion which could take several hundred years even. But "the decline of the United States" may be inevitable and it doesn't have to mean the destruction of our country. But it will mean things will change a whole lot. China is finally starting to follow us in that regard as this article pointed out. China may not be the super power some people fear after all. If that nation becomes politically unstable though, it could be very dangerous of course.

JediTricks

02-26-2008, 05:42 PM

I've been warning of this for years. China's running out of materials and actually stealing manhole covers to get metals to make molds - a lot of Chinese business has been stolen from North American manufacturing by Chinese companies giving away free molds to get contracts. But the expenses of overseas shipping would have caught up to the cost breaks soon anyway, and Chinese labor cost increases were already hitting industry a year ago.

Most likely, manufacturing will return to Mexico (Mexico and China can be roughly on-par with US moldmaking, but the reality of the situation is that you have to pay the labor enough to get that quality) when shipping costs become a bigger deal - trucks and short-distance boats are a lot cheaper than overseas shipping, and a lot quicker which can be another benefit. Also, the closer the manufacturing gets to the US, the more quality control companies will be able to implement since they won't have as far to travel to do so. Unfortunately, US manufacturing has fallen into disrepair from outsourcing and can't catch up without a major paradigm shift, right now it's either moderately cheap but very shoddy or exceedingly expensive and still risking slop.

Jargo

02-26-2008, 08:47 PM

they need to use pygmies. with small hands for the fiddly stuff. that's why the chinese are so good. mmm hmmm. all you'll get from using full size people is shovel handed foul ups.

Jedi_Kal-El

02-26-2008, 08:53 PM

they need to use pygmies. with small hands for the fiddly stuff. that's why the chinese are so good. mmm hmmm. all you'll get from using full size people is shovel handed foul ups.

I always thought they used Oompa Loompas.

Jargo

02-26-2008, 09:13 PM

no they're just children wearing fake beards.

Jedi_Kal-El

02-26-2008, 09:15 PM

You just broke my heart. :sad:

Edit: Loompas, Noooooooo!!!

2-1B

02-26-2008, 10:05 PM

I work in outsourcing and my company is seeing this as well.

Blue2th

02-26-2008, 10:57 PM

China still has to buy food because of shortages as stated in the article. Also the raw materials to manufacture go up in price.

It's a good time to be invested in commodities.

TeeEye7

02-26-2008, 11:59 PM

Most likely, manufacturing will return to Mexico....

Now's my chance to cross the border illegally, get a job there, and send my money back to the US! :laugh:

jedi master sal

02-27-2008, 08:30 AM

Now's my chance to cross the border illegally, get a job there, and send my money back to the US! :laugh:

This is what I find ludicrous about overseas manufacturing...our businesses go there because of one, cheap labor and two, we have a habit of going to countries that have very low standards for environmental protection and labor/human rights issues...we exploit it, people/countries become wise, standards start to rise (which is good) and then we seek out the next country willing to sacrifice themselves for material goods. BRILLIANT! Pretty soon there will be no countries left to exploit or they will just simply give us the finger, and then what? Seriously! I get angry at myself as well because I am a contributor because I buy 'stuff'. No one is guiltless. It is a sad situation because we won't stop consuming!

Tycho

02-29-2008, 01:39 AM

Deoxy, this practiced is studied and the recommended school of thought in all my studies of economics.

Some countries have (the school vocabulary test term) a comparative advantage in cheap labor. Other places have the resources or the enterpreneurs. In a global market (a phenomenon forever established because of technology from shipping to electronic conferencing) this is ever more so the practice. Our nation was founded on this practice, too.

The English said that religious nuts could come here and work with the natural resources they found and helped themselves to over here in "the new world" and practice whatever faith they wanted. It's a cheap sale to just tell someone "Jesus would be proud of you." So they came here as indentured servants (or slaves) and finally they prospered and wanted representation badly enough to revolt - hence we're the United States now instead of part of the United Kingdom.

So this is not something that America started, but instead is something that HUMAN NATURE brings with it.

Now capitalism without socialism intervening, is doomed to failure and things like the 3rd world countries result from it (see Mexico). So eventually, Americans will become poorer than the Indians or Vietnamese as things shift around the world (and out of China as this article is describing). So finally, inventive enterpreneurs in Vietnam (maybe) will find cheap labor in the uneducated, ignorant masses of mostly brown-skinned Americans, and a new wave of prosperity might begin here. All this depending upon the survival of our political institutions of course.

But history has shown this occuring over and over again. Rome and England both once ruled the world.

In the long run, America cannot be "saved," but will likely decline and be reborn. In the meanwhile, people will blame immigration and supply racism as the reasons, possibly homosexuality. They'll desperately try to hold on to old religions because they think that somehow trying to prevent the extinction of white, Christian America will stop this.

The truth being told is that older white families have discovered that having less kids preserves their estates and doesn't force crippling divisions upon a familiy's wealth's continuence. Also, with abortion being more easily accessed by middle-class whites who have a lot less incentives to live on AFDC welfare (as their standard of living would have to severely fall so they could even qualify), a huge conservative effort to stop abortion has been going on for years. I think it could really be a final stand effort to preserve the white race in America.

Part of this is that racism might have a "light dish" whereas grandparents want the continuation of their families to look like themselves. "Oh the baby has your father's eyes, etc." This family identification happens less with babies of mixed races. I'm not arguing for racial purity - don't miscontrue what I'm saying. Love is love (if it exists) - breed with whomever you're compatible with. I'm saying that this is one instance where racism is also natural - as well as when there are language or cultural barriers.

On and off, I have had a Latina girlfriend. She's actually half, herself - her mom's Anglo. And she's not really traditional Hispanic. However, I just as easily could have wound up with a daughter having the first kinsenara (spelling) party ever for a child in my family. What would my grandparents make of that? It's unfamiliar and people get comfortable, and stubborn in their ways. (I've never worked an iPod or iPhone, Blackberry, etc. and have no desire to learn right now myself - a relevant comparison in an indirect way).

But the world will keep on turning and the cycle will continue, until one day capitalists in Afghanistan will seek out cheap Latino-American labor in the United States to produce whatever it is that they are inventing.